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The most important sections of the registration statement are distributed to investors in
the form of a prospectus. In the appendix to this chapter we have reproduced the prospectus
for Marvin’s first public issue of stock. Real prospectuses would go into much more detail on
each topic, but this example should give you some feel for the mixture of valuable information
and redundant qualification that characterizes these documents. The Marvin prospectus also
illustrates how the SEC insists that investors’ eyes are opened to the dangers of purchase (see
“Certain Considerations” in the prospectus). Some investors have joked that if they read each
prospectus carefully, they would not dare buy any new issue.
In addition to registering the issue with the SEC, Marvin needed to check that the issue
complied with the so-called blue-sky laws of each state that regulate sales of securities within
the state.^13 It also arranged for its newly issued shares to be traded on the Nasdaq exchange.The Sale of Marvin Stock
While the registration statement was awaiting approval, Marvin and its underwriters began to
firm up the issue price. First they looked at the price–earnings ratios of the shares of Marvin’s
principal competitors. Then they worked through a number of discounted-cash-flow calcu-
lations like the ones we described in Chapters 4 and 11. Most of the evidence pointed to a
market price in the region of $74 to $76 a share and the company therefore included this pro-
visional figure in the preliminary version of the prospectus.^14
Marvin and Klein Merrick arranged a road show to talk to potential investors. Mostly
these were institutional investors, such as managers of mutual funds and pension funds. The(^13) In 1980, when Apple Computer Inc. went public, the Massachusetts state government decided the offering was too risky and barred
the sale of the shares to individual investors in the state. The state relented later after the issue was out and the price had risen. Need-
less to say, this action was not acclaimed by Massachusetts investors.
States do not usually reject security issues by honest firms through established underwriters. We cite the example to illustrate the
potential power of state securities laws and to show why underwriters keep careful track of them.
(^14) The company is allowed to circulate a preliminary version of the prospectus (known as a red herring) before the SEC has approved
the registration statement.
● ● ● ● ●
FINANCE IN PRACTICE
❱ CEOs frequently complain that the burden of com-
plying with the Sarbanes-Oxley Act (SOX) has deterred
U.S. companies from going public, or has induced
them to list in London rather than New York. In 2011
the President’s Council on Jobs and Competitiveness
backed this belief. The council noted that 2008 and
2009 experienced fewer venture-backed IPOs than
any year since 1985. The number of IPOs smaller than
$50 million fell from 80% of all IPOs in the 1990s to
20% in the 2000s. The council concluded:
Well-intentioned regulations aimed at protecting
the public from the misrepresentations of a small
number of large companies have unintentionally
placed significant burdens on the large number of
smaller companies. As a result, fewer high-growth
entrepreneurial companies are going public, and
more are opting to provide liquidity and an exit for
investors by selling out to larger companies. This
hurts job creation, as the data clearly shows that job
growth accelerates when companies go public, but
often decelerates when companies are acquired.
Thus, to stimulate the IPO market and spur more
job creation, nearly all members of the Council rec-
ommend that Congress . . . amend Sarbanes-Oxley
(SOX) to allow shareholders of public companies
with market valuations below $1 billion to opt out
of at least Section 404 compliance, if not to all of
the requirements, of Sarbanes-Oxley; or, alterna-
tively, exempt new companies from SOX compli-
ance for five years after they go public.
Has SOX Damaged the IPO Market?
(^) “Taking Action, Building Confidence,” The President’s Council on Jobs
and Competitiveness Interim Report, http://www.jobs-council.com, p. 19.
BEYOND THE PAGE
mhhe.com/brealey12e
Twitter’s IPO
prospectus